Report: Inflation is causing families to burn through their pandemic savings
Americans are dipping into their savings to deal with inflation, according to Moody's Analytics.
The Wall Street Journal reported a Moody's Analysis of government data showing that people have spent about $114 billion of the money saved during the pandemic.
Forbes Dixon, an economist who teaches at Wake Technical Community College, said many middle-class Americans kept their regular paycheck during the pandemic, in addition to receiving government stimulus payments.
"There wasn't a whole lot to do for a good chunk of 2020 and even 2021 for a lot of folks," Dixon said. "What are you going to do with [the money]? A lot people would just park it somewhere."
Government statistics show the personal savings rate, which indicates how much money remains after spending and taxes, reached a record of 34% in April 2020. By May 2022, that rate had plummeted back to 5%, which is much closer to the historical average.
Dixon is concerned that wage gains many people have experienced over the past few years are leading them to increase their spending instead of their savings. He said it's especially worrisome because of a possible economic downturn.
Dixon said the U.S. Federal Reserve's interest rate increases historically precede recessions.
"I'm not one to say we're out of the weeds," he said. "The worst may be yet to come."
Dixon fears that because the labor market has been tight, the relatively higher unemployment resulting from a recession might be closer to "normal" unemployment.
"It's not like a typical recession where you have high unemployment and deflation. It's more like the 1970s where there's high unemployment and inflation. And that's no fun," he said. "It's never fun, but that's even less fun."
Dixon said it’s wise for people to think long-term and save for future trouble and goals.
Many people use raises to increase their lifestyle instead of using raises to increase their savings habits, he said.
Dixon recommends families use any spare cash they have to pay off credit card debt and loans ahead of a possible recession.
"That's more you get to save and spend on yourself and not give away to somebody else," he said.
While he is not a financial planner, Dixon urged people to pay down debts, curb spending and build a financial cushion against future problems.
"My personal opinion is that it probably will get worse before it gets better," Dixon said. "But I'd be happy to be wrong about that."
